EDITORIAL: The July-August 2022 current account (C/A) deficit shrank by 19 percent due to 240 million dollar lower import bill compared to the comparable period of the year before no doubt on the back of decisions taken by the authorities that violated the Performance Criteria agreed with the International Monetary Fund (IMF) on non-imposition of import restrictions that included: (i) a ban on import of luxury and non-essential items (repealed partly in August with the ban in place on cars, mobile phones and household appliances); (ii) seeking payment authorisation from State Bank of Pakistan (SBP) before initiating transactions for importing certain goods with approval granted in a discretionary manner (the government pledged to end this by end August 2022); and (iii) limitation on advance payments for imports against letters of credit and advance payments up to a certain amount per invoice (without LCs) for the import of eligible items.
However, the seventh/eighth review documents reveal that the authorities noted with concern the prevailing disorderly foreign exchange market conditions, no doubt exacerbated by the raising of the rate by the Federal Reserve Board which has strengthened the dollar vis-a-vis all currencies, including the Pakistani rupee, and argued that restrictions would be removed when complementary macroeconomic policies have kicked in.
In effect, the Pakistani authorities correctly argued that with a dearth of foreign exchange reserves, at only 7.69 billion dollars on 26 August, the option to strengthen the rupee through market interventions was not available which necessitated taking measures to impose import restrictions. Regrettably, these import restrictions have partially been lifted as per the IMF last review and the impact of such measures on the current account deficit for September 2022 and onwards would again be negative.
The Fund’s September 2022 seventh/eighth review further notes, “staff emphasised that more prominence should be given to exchange rate flexibility as a means to address the Balance of Payment pressures rather than administrative exchange measures.” Such advice to a developing country where many had already been pushed down to under the poverty line due to the extremely tight monetary and fiscal policies agreed under the 2019 Extended Fund Facility programme (with a reprieve of about two years or so due to the Covid-19 onslaught) is simply inexplicable given the scale of the devastation caused by torrential rains and flash floods that began in June this year and whose effect continues to this day with the additional concern voiced by the World Health Organisation (WHO) that the eruption of flood-related diseases amongst the 33 million flood-hit people has the potential for a “second disaster".
The Fund report further urges the government to create fiscal space (which would significantly contract as the GDP growth is scaled down due to the floods) to not only increase the number of Benazir Income Support Programme (BISP) beneficiaries but also to raise the monthly stipend – an exhortation that is baffling as the devastation continues to unfold. Those who oppose the Fund’s standard policy conditions because of their devastating impact on the low income groups would no doubt feel vindicated by its latest report.
While it is disturbing that the Letter of Intent (LoI) submitted by the government to the Fund which led to the disbursement of 1.16 billion dollars had contained at least a passing reference to the floods and their possible impact yet one sincerely hopes that the authorities and the Fund staff rectify this oversight and take appropriate mitigation policy revisions to deal with the crisis facing 33 million people who have been hit harder by the calamity in the country.
Copyright Business Recorder, 2022
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